5 Reasons Second Cities’ Suburbs Are Key Markets for Home Builders

Mid-tier or second cities, loosely defined as cities with under a million people that aren’t regional centers of commerce, have caught the eye of Millennials, Gen z-ers and developers over the last decade. Cities, such as Fort Worth, Colorado Springs, Sacramento, and Jacksonville, have experienced a noticeable uptick in growth in the last five years due to lower cost of living, more affordable housing, an easier commute, and a more approachable feel.

Millennials and younger generations are moving to second cities over primary markets, and they’re opting to purchase single-family homes in the suburbs rather than pay the premium for renting or buying in the city.

The second city suburbs present an opportunity for home builders to thrive in an otherwise tough land acquisition and labor market. Here’s why:

1. Cheaper Talent. With lower cost of living and more available talent,  candidates can be hired for cheaper. Denver, Seattle, and Austin gained the most talent in 2018, followed by Las Vegas and Nashville. Smart home builders are focusing on recruiting and building in second city suburbs. The influx of talent and more affordable living allows builders to hire better candidates for less money than they can in major cities.
2. The Boomerang Effect. Millennials moving back home from larger cities to second-tier cities after college or a few years in the workforce have been coined “boomerangs”, and anecdotal and increasingly statistical evidence suggests it’s a growing trend. They’re prioritizing buying single family homes over living in urban areas, driving the demand for residential development in the suburbs.
3. High Demand for More Affordable Housing. Home builders can acquire land outside of secondary cities at a much lower cost than they can outside of primary and coastal cities. With a strong economy and booming real estate markets across most of the country for the past five years, builders have been focused on bringing luxury products to the market. But rising land prices and too much emphasis on luxury extras priced the majority of buyers out of the market. Builders are now realizing there’s more demand for entry-level homes than there is supply. Affordable land outside of second cities gives builders the ability to build single-family homes in the $250,000 – $350,000 range, which gives them a much larger buyer’s market.
4. The Lure of the Mid-Size City. Investment into parks, greenspace and downtown revitalization, coupled with tech companies, like Epic, Facebook, and Salesforce choosing headquarters in mid-size cities makes cities like Austin, TX, Madison, WI, Indianapolis, IN and Seattle, WA especially attractive to Millennials. As the coolness factor in these cities rise, so does the demand for homes — affordable enough for first-time home buyers.
5. Second Cities Have the Eye of Investors. With the affordable housing crisis and overbuilding that many primary markets are facing, investors are taking their money to second cities, which means better infrastructure, vibrancy, and sustainability. Unlike the investor activity in these secondary cities from 2005 to 2007, investors are taking a much more deliberate and thoughtful approach this time around, giving these cities greater potential for staying in power and weathering economic downturn. As money is pumped into these cities, they become more attractive for companies and residents wanting to plant permanent roots. Homebuilders, who follow investor money to mid-size cities and set their sights on developing affordable houses in the suburbs, are strategizing for success.

More Millennials and younger generations, the target demographic for many residential home builders, are moving to second cities. They want and can afford to buy homes in these markets. Smart home builders are creating the supply to meet their demands. The suburbs are cool again, and the second city suburbs have the land and the demand to make the residential home building business hot.